Workout Assumption

A workout assumption occurs when a qualified third party assumes an existing mortgage from a financially distressed borrower. This relieves the borrower from their repayment obligation once approved by the mortgagee.

Workout assumptions make sense for lenders because of the time and expense involved in foreclosing on a mortgage where the borrower has defaulted. A lender might find a temporary solution in situations where borrowers have transient issues with repayment, for example a mortgage forbearance agreement. For longer-lasting issues, however, a workout assumption can provide a reasonable way to help the borrower avoid foreclosure. Other possible remedies in this situation include a mortgage short sale or a deed in lieu of foreclosure. As long as the proposed solution costs the lender less than they would stand to lose in the course of a foreclosure, it makes sense for both parties to work out a deal.

Typically, a borrower having trouble making payments has an option to work with the lender to find a mutually acceptable way to keep the home out of foreclosure. For example, lenders might recommend refinancing a mortgage, or they may seek out mortgage assistance programs for which the borrower meets eligibility requirements. Workout assumptions require more legwork, so they generally become more attractive to lenders when the borrower's finances look particularly troublesome.

Borrowers propose a third-party individual or entity to step in and assume the loan obligation for them. The lender typically requires the third party to qualify for the mortgage and the third party must be aware that they will assume the mortgage as their own debt. Once all parties agree, the lender draws up new paperwork in order to effect the transfer from the original borrower to the third party and submits a new loan application to the bank. Once the bank approves, the third-party borrower must make regular payments on the loan. The third-party borrower may make arrangements with the original borrower allowing the resumption of payments if and when the original borrower gets back on their feet, but any such arrangements take place outside of the new agreement, which exists between the bank and the third-party borrower.

For example, suppose a young professional purchased a house and then lost her job, causing her to default on her mortgage. The bank offers several possibilities for restructuring the loan, but the job market remains stagnant in the area and the borrower has very little in terms of savings. The bank offers a workout agreement, and the borrower gets a family member to assume the loan. A year later, she gets a new job. Even though she could now resume loan payments herself, the loan technically remains in her family member's name.